Mind the gap between jobs data and the real economy

Rishi Sunak, the young and vibrant British politician currently serving as Chancellor of the Exchequer, recently made headlines when he dedicated one evening to serve as a waiter at a London restaurant.

Aside from the humour of watching him take a meal to the wrong table, it was a powerful demonstration of humility, a virtue that is in short supply these days. It was a strong reminder that policymakers need to be in touch with the ordinary lives of people for whom they craft policies for.

Humility recognises that there is much to learn beyond our immediate experiences and allows an open and curious mind to ask the most fundamental questions.

Only then can we arrive at basic truths about our society — truths which should lead us to greater freedom. The Covid-19 pandemic has paused our daily hustle and bustle and for the first time we have a collective opportunity to have deep reflections about the Kenyan economy.

At the heart of economics is the theory of price, which considers both supply and demand factors. The movement of price over a period should be accurately captured by inflation computations. However, growing evidence suggests that Kenyan inflation statistics might not be accurately capturing the true pricing situation that is facing the ordinary Kenyan.

It is important to note that some great work has been done to modernise the calculation of the basket of goods and services purchased by ordinary households. Dropping archaic goods such as radio and video cassettes and adding contemporary items like mobile money transfer fees is certainly a welcome move.

However, there is still some serious concern as to the specific weighting given to rent. The previous weighting of 18 percent of total expenditure was considered too low considering that most households spend well over 30 percent of their income on rent.

The subsequent lowering of the rent proportion of overall income to 14 percent seemed even more strange and is likely to skew how overall inflation is computed and applied. In the UK, the weighting given to rent is about 29 percent, while in the US it is about 33 percent. A second question worth pondering is on the true calculation of unemployment in Kenya. The latest Quarterly Labour Force report places unemployment in Kenya at 4.9 percent. Again, there is strong evidence to suggest that these numbers are not completely accurate. Even in industrialised countries with sophisticated labour markets, it is very rare to see unemployment levels going below five percent.

During his entire presidency, and after several rounds of economic stimulus, the best President Obama could get to was an unemployment rate of 4.7 percent.

Even putting statistics aside, one only needs to take a casual stroll past Nairobi’s central business district to get a feel of the high levels of unemployment and disenfranchisement within the largest city in the region.

The worst part of having an innacurate indicator for unemployment is that it prevents policymakers from formulating the necessary policies that will lift millions out poverty.

When doubts begin to emerge about the accuracy of Kenya’s inflation and unemployment data, the negative consequences can have lasting impact on the overall macroeconomic outlook.

Inflation and unemployment are the two critical cogs for developing the Philip’s curve — the most important tool for guiding monetary policy.

Without it, it becomes nearly impossible to assess the optimal money supply needed for the country — explaining why the economy is perennially cash-starved and must constantly depend on credit and crippling debt. Furthermore, the credibility of other macroeconomic indicators such as real interest rates and exchange rates comes into question. Indeed, the concern around Kenya’s exchange rate has attracted much criticism, not least from the IMF as well as market commentators. It is for this reason that many Kenyans feel as if there are two economies.

One that is on paper and often discussed in high-level conferences and another that is encountered outside in the streets and marketplaces — the real economy.

Luckily, the situation is not beyond correction. Much can be done to inject a dose of reality into our policymaking process. For that to happen, an effort must be made to bring together all the industry sectors together, from commercial banks, to insurance companies, fund managers as well as players in private equity, venture capital and industry regulators.

For a long time, these sub-sectors have been working in silos and often in competition with each other. Real solutions can only emerge when the spirit of humility, openness and genuine collaboration is employed to solve the real and pressing issues that continue to weigh heavily on the country’s economic future. Kenya has a competitive advantage in human capital. The time has come to fully deploy it.

Gichinga is Chief Economist at Mentoria Economics